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01/09/2006

The Economics of Indian Casinos--Posner

The recent conviction of the lawyer lobbyist Jack Abramoff has focused public attention on alleged bribes of Congressmen to enact legislation, and influence regulatory action, favorable to Indian casinos represented by Abramoff. What has received little attention is the underlying cause of public corruption, which often and in this case simply is bad laws.
Federal law treats Indian tribes as quasi-sovereigns, like the states, and gives them various privileges in using their lands (i.e., Indian reservations) that are denied to the residents of the states in which the reservations are located. In particular, it is much easier in most states for an Indian tribe to have a casino on its reservation than for any other landowner in the state to have a casino. As a result, Indian casinos are lucrative, especially when they are located near cities; in effect, Indian reservations have locational monopolies in the gambling industry. There are several hundred Indian casinos, and their annual revenues are close to $20 billion.
The profitability of Indian casinos has given rise to classic "rent-seeking" activities, that is, efforts to appropriate profits. These efforts take such forms as seeking federal recognition as an Indian tribe, seeking regulatory approval for a casino, and seeking a ban on the operation of non-Indian casinos; counterefforts include lobbying for relaxing state laws against gambling, laws that bolster the Indian casinos. All these efforts involve legislative or regulatory activity, creating a rich field for lobbying legislators, who exert direct and indirect control over regulation. Lobbying is not merely persuasion; it is also providing campaign contributions to legislators, and sometimes personal gifts (meals, travel, etc.), in anticipation of favorable treatment by the legislators to whom the contributions or gifts (or both) are given. The amounts, and number of legislators, involved are very great because of the very large profits that casinos generate.
But wait: why should a casino be profitable? A casino is just a retail entertainment establishment, like a restaurant, bar, nightclub, supermarket, or game room. The investment involved in a casino is modest, consisting of little more than a building plus gambling tables, roulette wheels, and one-armed bandits. Why should casinos be more profitable than grocery stores? And we know that grocery stores are not sufficiently profitable to generate heavy campaign contributions and gifts to legislators.
The answer is that gambling is a regulated industry. More particularly, entry is limited by government. This is not just a matter of requiring a license available to anyone able to pay a modest fee and perhaps meet some minimum legal and financial qualifications. In many states entry requires as a practical matter the entrant to prove that it is a bona fide Indian tribe, or, if it is not Indian, to convince a state legislature to permit non-Indians to compete.
The huge profits of gambling and the resulting temptations to corruption, both the quasi-corruption of large campaign contributions and the outright corruption of bribes, could be eliminated at a stroke by abolishing the limitations of entry into gambling. Then entry into the gambling business would proceed until the price of gambling fell to the cost of operating a gambling business. Of course, there would be more gambling if the price were lower, hence more gambling addiction (a real, although obviously a psychological rather than physical addiction--but so is addiction to cocaine), hence more bankruptcies due to gambling, and more broken marriages due to one spouse being a compulsive gambler. There would also be more competition for state lotteries, which would decrease state revenues. If these are deemed serious concerns, they can be dealt with by taxing gambling at rates high enough to limit demand without being so high as to create a black market, in much the same way that liquor and cigarettes are heavily taxed but not so heavily taxed that a black market emerges. Since the revenues from the taxes would go to government, there would no temptation for rent-seeking or corruption.
An incidental benefit would be to end privileges for Indians in a particularly insidious form. The rationale of affirmative action, which seems to me to have at least modest merit, is that it facilitates the integration of disadvantaged group into the larger American community; it promotes assimilation. But because Indian privileges are tied to tribal membership and residence on a reservation, it discourages integration and assimilation. Despite the profits generated by Indian casinos--and some of those profits are dissipated in rent-seeking activities (which are not costless), and some in the operation of the casinos, which is primarily by non-Indian companies--poverty, alcoholism, and violent continue to be disproportionately frequent on Indian reservations. The exit option probably deprives the reservations of many of their most promising residents, since an Indian who leaves the reservation, as he or she is free to do, is immediately entitled to all rights of a U.S. and state citizen. Would it be a boon to black people in the United States if they were permitted to live on black-only reservations on which they would be allowed to establish casinos? That would be a preposterous suggestion. It is equally preposterous when "Indian" is substituted for "black."
The Indian tribes do own the reservations, and if their members want to continue living there, that is their right. But there is no reason why they should have any privileges denied to people in the same state, whether Indian or not, who do not live on reservations.

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